Beginners on Trading, Be it Forex or crypto trading would always want to distinguish between Limit orders and Stop Orders in trading. For this cause, here's an intense definition and explanation of Limit Orders and Stop Orders in Exchange.
What is a Limit Order?
In Any Exchange, A limit order specifies the order placed to buy or sell. This order specifically stated the price at which you want to buy (bid) or sell (ask).
These orders are extremely useful to investors, and they are frequently used, as they play an important role in reducing the risks of trading, while securing profits.
How Do Limit Orders Work?
Incase you find it a bit complicated to understand what a limit order is, this brief explanation of how it works.
The Bid, otherwise called the buying limit order is a pending order to buy an asset. The order is executed when value dips to or below a determined value.
Example
An Investor on a Crypto Exchange platform bidded to buy ETH at a set price of $350 when the current market price was $361, The Buy order automatically executed when the price falls to $350 or below the limit.
The Ask, otherwise called the Selling limit order is a pending order to sell an asset. Once the set order falls to or below the limit, The asset is automatically sold to a bidder.
Example
Mcdonald had an asset bought at $350, in order to make profits, he asked a limit of $360 as a limit order. The order executes when the limit of $360 is reached and Mcdonald makes $10 profit.
What is a Stop Order?
A stop limit order is a combination of a stop order and a limit order. With a stop limit order, after a certain stop price is reached, the order turns into a limit order, and an asset is bought or sold at a certain price or better.
How Do Stop Limit Orders Work?
Having understood the definition of a Stop order, in the sense of application, here is how it works.
For an investor who is buying, A buy stop order is a pending order to buy an asset if its value rises to or above a determined value. This kind of order is placed if an investor is certain that the value would be much more below it's limit.
It is also applicable to an investor who is selling his/her asset on a trade, the stop limit order is used if the value of an asset dips to or below a determined value. The trader opens a Sell Stop if he/she believes that the asset’s value will decrease further after the position is opened.
Importance of Stop & Limit Orders in an Exchange
For purposes of risk management in a Trade, it is very important to employ the stop and limit Orders.
Also this gives an investor charge over his/her time because there would be no need to be going online daily and monitor positions. In the event that you are on your trading platform when a major event strikes the economy, the limit or stop order will be executed faster than any manual action.
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